Nowadays there is a tendency for central banks to increase
transparency in the conduct of monetary policy. Central bank
transparency could be defined as the existence of symmetric information
between monetary policymakers and other economic agents. High degrees of
transparency reduce uncertainty, improve the private-sector inference about central bank goals, and increase the effectiveness of monetary
policy. There is now an increasing literature that measures the effects
of transparency on average inflation, output volatility (Chortareas,
Stasavage, and Sterne 2002), the efficiency of monetary policy
(Cecchetti and Krause 2002), and the volatility of financial markets
(Ehrmann and Fratzscher 2005).

Some empirical analysis highlights the advantages of transparency
due to a fall in asymmetric information. Siklos (2000) analyzes the
impact of Canadian central bank transparency on the uncertainty of
financial economic agents through a change in kurtosis of some financial
assets for different periods. The analysis of kurtosis is made around
dates of changes in the basic interest rate and the publication of the
bank's Inflation Report. Furthermore, Siklos subdivides the period
under analysis taking into consideration the introduction of the
inflation target and the bank's Inflation Report. His results
indicate that, if there is clarity (central bank publishes quality
information), an increase in central bank transparency reduces the
uncertainty in the financial market. (1)

Clare and Courtenay (2001) also studied the impact of central bank
transparency on financial assets. They found that an increase in the
Bank of England's transparency improved the efficiency of the
financial market. There was an increase in the speed of reaction of
financial assets to the bank's announcements of the basic interest
rate.

Muller and Zelmer (1999) evaluate whether the price of financial
assets anticipates changes in the basic interest rate in the Canadian
economy. Their analysis reveals that there was an increase in the
anticipation of monetary policy action by economic agents after the
central bank independence (operational). In this period, the variations
in the past spreads are more sensitive to the changes in the date of
monetary policy committee meetings than in the periods where the central
bank does not have operational independence.

The importance of central bank communication is highlighted by
Bernanke (2004b) through a phrase published by the Federal Open Market
Committee (FOMC): "In these circumstances, the Committee believes
that policy accommodation can be maintained for a considerable
period." According to Woodford (2005), that phrase was responsible
for a substantial fall in the interest rate in the futures market. When
the information "maintained for a considerable period" was
eliminated by the FOMC from the minutes, the interest rate returned to
the previous level. Bernanke (2004a) strengthens the argument that in
the case where the public does not believe in the central bank's
explanations and forecasts, economic transparency and transparency on
monetary policy decisions will no longer function as guides for the
public's expectations.

The main objective of this article is to analyze the impact of
transparency at the Central Bank of Brazil (CBB) on macroeconomic variables. In particular, we consider the effect of the CBB's
announcements and publications on several variables related to the
inflation targeting system, including expectations.

CBB Transparency and Macroeconomic Performance

To evaluate the effect of CBB transparency on macroeconomic
variables, we examine the behavior of the one-day interbank interest
rate with payment in one month and three months (i.e., future contracts
with interbank deposits). The data used in the analysis are from the
Brazilian Mercantile and Futures Exchange for January 18, 2002, to March
13, 2006. (2) We consider expectations for the following variables:
over-SELIC (basic interest rate) in the short and long run; inflation
(measured by IPCA, the official price index); (3) public debt/GDP ratio;
and the exchange rate. All data are from the CBB's Focus survey.
Furthermore, to determine the reaction of the stock market to the
CBB's publications, we use the Bovespa index (Ibovespa). The
justification for using these variables is that they are intrinsic to
the CBB's inflation targeting, and the Monetary Policy Committee
(COPOM) takes them into consideration when evaluating the economy's
future and in making decisions about the SELIC target. The impact of the
CBB's main publications--COPOM minutes and the Inflation Report--on
macroeconomic variables will be of primary interest.

When the central bank has political transparency the advantages
from economic transparency and from transparency on monetary policy
decisions become more evident. Hence, a period of political opacity is
understood as that where there is uncertainty concerning the future
behavior of monetary policy. This vision is observed in the Brazilian
case. The CBB states in the Inflation Report (December 2002 and March
2003) that one cause of deterioration of the inflation expectation was
the public's uncertainty about the future of monetary policy.

In general, the uncertainty is a consequence of the tradition of
the Latin American left and the history of monetary policy in Latin
America. Thus, people expect that prior to elections the monetary
authorities will take actions to stimulate short-run output and
employment. The political business cycle in Brazil was evident during
the elections of 1986, 1989, and 1998. Hence, in evaluating the
CBB's transparency and its impact on macroeconomic variables, we
need to distinguish between the periods with opacity and with political
transparency.

After the adoption of inflation targeting in June 1999, there was a
period of opacity during the penultimate Brazilian presidential
election. That opacity occurred because of the favoritism and the
victory of Luis Inacio Lula da Silva, the candidate of the left party.
The market was uncertain about his macroeconomic policies, given his
trade union background and his softness on price stability. The reason
for political opacity was the absence of legislation that would ensure
the CBB's operational independence. In Brazil, there is only a
tacit accord that gives operational independence for the CBB. In
addition, the president of the republic appoints the members of the
National Monetary Council, which sets the CBB's inflation target.
Consequently, we shall label the period between May 31, 2002, and August
1, 2003, the period of political opacity (OP). In contrast, we shall
label the period prior to May 31, 2002 (TRANI: January 1, 2001, to May
31, 2002) and the period after August 1, 2003 (TRAN2: August 1, 2003, to
March 13, 2006) as having political transparency.

Table 1 presents the kurtosis for our data series taking into
consideration all days in the period. We see that the kurtosis is lower
during the electoral period compared with the other periods. This
electoral period is marked by political opacity, meaning an increase in
uncertainty in the conduct of monetary policy. This effect is observed
through a low kurtosis concerning inflation expectations and, thus, an
increase in the tradeoff between inflation and unemployment. In this
case, the explanations and actions of the CBB did not produce the
desired effect and control over inflation expectations was damaged.

Two other periods are analyzed: five days before and after the
COPOM minutes and five days before and after the publication of the
CBB's Inflation Report. The comparison between the publication of
COPOM minutes and the Inflation Report for the period TRAN2 denotes that
the kurtosis is higher for the variables that compose the inflation
targeting around the date of publication of the Inflation Report.
Therefore, uncertainty about the exchange rate (nominal), inflation, and
the basic interest rate (short-run and long-run SELIC) is lower in a
monetary regime having an Inflation Report. In the period of political
opacity, however, the kurtosis is higher around the date of publication
of the COPOM minutes. This result denotes a change in the behavior of
economic actors who demand information with more frequency. (4)

Another way to analyze the effects of central bank transparency on
macroeconomic variables is to apply the method used by Clare and
Courtenay (2001). According to Clare and Courtenay (2001), the abnormal
reaction is the difference between the excess of the variables in the
period of political opacity (May 31, 2002 to January 6, 2003) with the
period of political transparency (January 7, 2003 to March 13, 2006).
(5) In the Brazilian case, these excesses correspond to the difference
between the average of the variable around the COPOM decision (interval
of one day) and its average on the days without a decision. For
instance, to calculate the abnormal reaction of inflation expectations,
we subtract the excess of that variable for the OP period OP (9.86 -
9.67 = 0.19) by the excess in the TRAN2 period (6.821 - 6.817 = 0.004).
Therefore, the abnormal reaction corresponds to 0.186 (0.19 -
0.004)--that is, in the period of political opacity the public's
inflation expectations are stronger than in the period when the
CBB's policy is more transparent. This procedure is also applied to
the future interest rate (1 month and 3 months), and the results are
presented in Table 2. The results indicate positive abnormal reactions,
which indicate a low capacity of economic actors to anticipate the
CBB's actions in a period of political crisis.

Publication of the CBB's Inflation Report and Volatility of
Macroeconomic Variables

Volatility is understood as the daily change in the value of the
series. Furthermore, the option to study the change and not the level of
the series has as its objective to analyze the possible change in the
rate with which the public readjusts its expectations. If the volatility
on the previous day of the publication of the CBB's Inflation
Report is higher than on the day of publication, this behavior denotes
that the market anticipated the information in the report. It is
important to note that, if the level of the series is used in the
analysis instead of volatility, there would be a bias in the results
because a change in the level could not be related to the Inflation
Report.

In Figure 1, the graph of the future interest rate (1 month) shows
that the information in the Inflation Report of June 28, 2002, changed
the public's expectations. The volatility went from almost 90 basis
points before the publication of the Inflation Report to-100 basis
points on the day of publication. Furthermore, the change from a high
positive volatility to a high negative volatility denotes an inflection
point in the perception of economic actors to the future decisions
concerning monetary policy. Therefore, on the day before the publication
of the Inflation Report (June), the market increased its expectations
for the next COPOM meeting concerning the definition of the basic
interest rate. However, on June 28, 2002, the public's expectations
of an increase in the interest rate changed to expectations of a
decrease in the interest rate. In this report, the CBB emphasizes a
lower pressure on market prices due to an increase in the past interest
rate.

In Figure 1, the graph related to the future interest rate (3
months) reveals an increase in the volatility of this variable in June
2002. The volatility before the Inflation Report was--40 basis points
and on the day of publication the volatility was--60 basis points. Thus,
a prospective analysis of the Brazilian economy in the Inflation Report
increased the public's expectation that there would be a decline in
the basic interest rate in the last quarter of 2002. Nevertheless, the
3-month future interest rate fell less than the 1-month rate. The
possible justification is the Inflation Report's warning about the
financial market in light of the uncertainty about monetary policy.
According to the Inflation Report, this uncertainty is one of the main
reasons for the deterioration of the public's inflation
expectations in that period.

In Figure 1, the volatility of the SELIC expectations (short run)
for the current year reveals an increase of almost 25 basis points on
the day when the March 2003 Inflation Report was published. The
perspective of a war in Iraq, the inertia caused by the high inflation
in the last quarter of 2002, and the fact that the inflation forecast
was higher than the inflation target for 2003, produced an increase in
the short-run SELIC expectations. However, in the June 2004 Inflation
Report, the volatility in the SELIC expectations fell from 15 basis
points on the day before the Inflation Report to zero on the day of its
announcement. Tiffs behavior strengthens the argument that, in the
periods with political opacity, the CBB'S Inflation Report is not
sufficient to stabilize the public's expectations. In spite of this, these periods are marked by volatility in expectations about the
short-run SELIC in response to the announcement of the CBB's basic
interest rate target.

[FIGURE 1 OMITTED]

Even though the volatility of the public's expectations about
the shortrun SELIC for the current year are influenced strongly by the
CBB's Inflation Report, the volatility of this variable one year
ahead is not very sensitive to the Inflation Report. The same does not
apply to expectations about the long-run SELIC for the current year and
one year ahead. Figure 1 shows that the behavior of the SELIC
expectations (long run) for the current year increased more than 25
basis points after the publication of the Inflation Report (March 2003).
In that report, the CBB highlighted the increase in inflation forecast
for 2003 compared with the previous report.

In June 2004 and March 2005, there was a different movement
compared with what occurred in March 2003. The market (readjusted upward
in relation to the SELIC expectations (long run) for the current year.
On the days when the Inflation Report was published, volatility fell
from close to 10 basis points to zero. Thus, the market anticipated the
CBB's opinions in the Inflation Report, which, in tuna, became
common knowledge. Hence, at the beginning of the new government, the
CBB's president had the task of building a credible monetary
policy. It is observed that the Inflation Report implied an increase in
the rate of the readjustments of the SELIC expectations (long run) for
the current year. However, when the CBB'S credibility was
consolidated, the volatility in the expectations converged to zero--on
the day the Inflation Report was published. (6)

The volatility in the SELIC expectations (long run) for one year
ahead was zero on the day before the September 2003 Inflation Report was
published and -40 basis points after its publication. The CBB stated
that the decrease in the inertial component of inflation and the
increase in the importance of inflation expectations guided the market
to a downward readjustment in SELIC expectations (long run) for the next
year. Furthermore, the September 2003 Inflation Report indicated that
the inflation forecast for 2004 was close to the inflation target.

The impact of the Inflation Report of June 2003 and June 2004 on
SELIC expectations (long run) are different from those of the September
2003 report, because there was a convergence to zero in the volatility
of this variable. In the June 2003 Inflation Report, the CBB's
forecast indicated that inflation peaked in the second half of 2003.
This fact implied a change in the rate of readjustment of SELIC
expectations (long run) for the current and one year ahead. In this
case, the first difference of this variable, which was positive, became
zero. This observation is also valid for the June 2004 Inflation Report,
which published an inflation forecast (for 2004 and 2005) that was lower
than expected by the market. As a consequence, the market stabilized the
SELIC expectations (long run), as observed through a fall in volatility
(convergence to zero).

Publication of the COPOM Minutes and Volatility of Macroeconomic
Variables

The graphs in Figure 2 compare the volatility of macroeconomic
variables on the publication date of the COPOM minutes with volatility
the previous day. The graph of the future interest rate (1 month) shows
a fall in volatility (negative) on October 21, 2002, the day the minutes
were published. The COPOM states that the objective of the CBB's
monetary policy is to control inflation, not the exchange rate.
Furthermore, the CBB justifies increasing the interest rate because of
higher inflation expectations. As a consequence, expectations about the
future interest rate (1 month) were readjusted upward (volatility
changed from -80 basis points to -15 basis points on the day the minutes
were published).

Another important effect of the COPOM minutes on expectations about
the future interest rate (1 month) is seen from the minutes of December
1, 2005. On the day prior to publication, volatility was almost zero.
However, upon publication of the minutes, volatility plunged to -30
basis points. The main reason for this movement was the CBB's
policy decision to reduce the interest rate to achieve macroeconomic
stability.

In Figure 2, the graph for the volatility of the future interest
rate (3 months) reveals that the publication of the COPOM minutes on
October 30, 2002, saw a significant fall in the volatility (40 to -10
basis points). The expectations of a decrease in the future interest
rate were intensified in November. On November 20, 2002, the volatility
was close to -30 basis points, which pointed to an increase in the
volatility of the future interest rate (3 months). The change the
public's perception of inflation was due to the statements of COPOM
(after October 2002) that the Brazilian economy was improving. An
example of this good environment was the increase in demand for
Brazilian public debt and the fall in country risk.

[FIGURE 2 OMITTED]

The minutes of March 2003 and September 2004 highlight the change
in the volatility of the future interest rate (3 months). Due to the
minutes of March 2003, the volatility increased 30 basis points while
the minutes of September 2004 implied a fall of 43 basis points. In
relation to the minutes of March 2003, the justification for this
behavior was the risk in the control of inflation. The COPOM highlighted
the uncertainties related to the tall of inflationary inertia and the
war in Iraq. Besides this, the forecasted inflation for 2003 was higher
than the adjusted inflation target (8.5 percent), and the readjustments
of prices and wages could be based on accumulated inflation. In the
minutes of September 2004, the COPOM called attention to the increase in
economic activity, which justified an increase in the basic interest
rate due to the risk of the departures from the inflation target (5.1
percent). An important point in these minutes was the revelation of the
use of gradualism in the conduct of the monetary policy. The speed of
the rate of adjustment of the market was quicker than proposed by the
CBB, and the publication of the minutes contributed to the understanding
by the market.

With regard to the behavior of volatility of the short-run basic
interest rate (current year) expectations, the minutes published on
February 20, 2003, August 28, 2003, September 24, 2003, and April 28,
2005, deserve attention. The volatility associated with the minutes of
February 2003 increased almost 20 basis points because the CBB announced
a tight monetary policy to constrain inflation. The indication of an
additional effort to control inflation increased the SELIC short-run
(current year) expectations on the day the minutes were published. With
regard to the minutes of January 2005, one sees an increase in the
volatility of the interest rate. A possible justification for this
behavior is because the COPOM stated the necessity of increasing the
basic interest rate, followed by a long period of stabilization. As a
result, there was an upward readjustment of expectations about the
short-run SELIC (current year) for 2005.

With regard to the analysis concerning the volatility of the SELIC
short run (one year ahead), one should observe the COPOM minutes for
August 28, 2003, January 16, 2004, and April 28, 2005. In the minutes of
August 28, 2003, COPOM emphasizes the fall in industrial output and in
the level of economic activity as responsible for a loosening of
monetary policy. According to COPOM, the basic interest rate must be
reduced, in a gradual way, until the real interest rate converges to
that compatible with the accomplishment of the inflation target. The
main reason for this possibility was due to the improvement in the
fiscal picture (medium and long run). Hence, the volatility decreased by
40 basis points on the day of the announcement, indicating the strong
impact of CBB transparency on expectations about the future interest
rate (short run).

In the minutes of January 16, 2004, the main point was COPOM'S
uncertainty about future inflation. As a consequence, the CBB decided to
stop easing monetary policy. That decision led to a fall of 23 basis
points in SELIC expectations for 2005. In the minutes of April 28, 2005,
the justification for increasing the basic interest rate to 19.5 percent
was due to rising inflation expectations, associated with an increase in
administered prices, and due to the volatility in international capital
markets. As a result, there was an upward readjustment in the
public's expectations (volatility future interest rates readjusted
upward by increased nearly 50 basis points).

The graph in Figure 2 denotes that the minutes that are relevant to
the analysis of inflation expectations (current year) are those
published on January 20, 2003. The volatility was almost 12 basis
points. The economic agents who reduced their inflation expectations on
January 19, 2003, changed their behavior on January 20, 2003, due to the
information in the published minutes. The main motives for the departure
of inflation from the target were the imminent war in Iraq and the
CBB's inflation forecast being above the adjusted inflation target.
Even so, except the second half of 2002 (a period of high opacity), the
inflation expectations (current year and one year ahead) are only
slightly sensitive to the publication of the COPOM minutes.

Volatility of Macroeconomic Variables around the Date of CBB
Announcements and Publications

In this section, based on the methodology developed by Muller and
Zelmer (1999), the reaction of the spread between the future interest
rate (1 month) and SELIC on the days around the publication of the
Inflation Report is analyzed. Table 3 presents the average volatility
around the spread of the interest rate (2 days before and 2 days after
publication of the Inflation Report) for each day of the interval and is
related to the period between March 28, 2002, and January 25, 2006. The
results reveal an average volatility around the day of the Inflation
Report that corresponds to -0.106, which is lower than the average
volatility from the five-day interval (0.341).

The results in Table 3 indicate that, on average, the reaction of
economic agents is no higher on the day the Inflation Report is
published than on other days in the interval. Therefore, the
public's expectations are in accord with the CBB's forecasts
on the future of monetary policy. This result is not valid for the
December 2002 Inflation Report, when the reaction of the future interest
rate was too high.

Muller and Zelmer (1999) affirm that the perception of an
inflection point in the future strategy of monetary policy causes an
intense reaction by the economic actors. Thus, high variations on the
day the Inflation Report appears indicate that there is new information
in the report. In the Brazilian case, a good example is GBB President
Arminio Fraga's statement in the Inflation Report of December 30,
2002, which revealed the expectation that the next government would
maintain low inflation. That information was new for the market and, as
a consequence, justified the reaction of the spread.

The Influence of COPOM Minutes on the Brazilian Economy

The objective of this section is to analyze the relation between
future interest rates with different maturities (1 month, 3 months, and
6 months) for the periods close to the publication of COPOM minutes. For
our analysis, we select a period without crisis--namely, the period
between January 15, 2004, and June 20, 2006. This period is divided into
two intervals: January 15, 2004, to July 26, 2004, and July 27, 2004, to
December 2, 2005. This division is necessary due to the change in the
language used in the COPOM minutes. Beginning with the July 29, 2004,
minutes, the CBB used the words "sufficiently long" to give an
idea of the future direction of monetary policy.

Figure 3 shows the performance of the one-day future interbank
interest rate (maturities 1 month, 3 months, and 6 months). It is
observed that the interest rates with different maturities depart from
each other after the announcement of maintenance of the basic interest
rate for a sufficiently long period (July 2004). (7) As time advances,
the interest rates converge to the same value until the inflection
point. After this, the tendency is for a departure among them with the
future interest rate (6 months) being lower than the others.

[FIGURE 3 OMITTED]

Table 4 shows the behavior of future interest rates (January 15,
2004, to October 27, 2005) and it is divided into two groups. The first
treats the level of variables (columns 3-1 level and 6-1 level), while
the second reveals the rate with the economic actors readjust their
expectations concerning future interest rates (columns rate 1, rate 2,
and rate 6). In the columns concerning the level of future interest
rates, a positive sign (+) denotes an increase in the difference among
the interest rates, while a negative sign (-) indicates a decrease. For
instance, a positive sign in column "3-1 level" indicates that
the difference between the future interest rates with maturities of 3
months and 1 month increased with the publication of the COPOM minutes.
Furthermore, the labels "medium, high, and low" give the
magnitude of the difference. In addition, the classification in bold
(non-bold) denotes that the future interest rate with a higher (lower)
maturity is less than that with a lower (higher) maturity.

The COPOM minutes of July 2004, stated that the CBB would increase
the SELIC until the level where the basic interest rate would be
maintained for a sufficiently long period. In this case, the COPOM
signaled to the market that the inertial inflation would be combated
until it vanished. The indication that there would be a continued
increase in the SELIC provoked a strong increase in the difference
between the 6-month future interest rate and the 1-month rate (see Table
4, the line relative to the minutes of December 23, 2004, column
"3-1 level"). This behavior is repeated in the subsequent
minutes. However, in the minutes of February 24, 2005, the large
difference between the 6-month and 1-month rates starts to fall (-high),
and in the next COPOM minutes the difference changes to
"medium." In this sense, the interest rates with a higher
maturity are less sensitive to the passage of time due to the fact that
the economic actors anticipated the adjustments in SELIC.

The analysis concerning the volatilities of the series (in first
difference) is presented in the columns Rate 1, Rate 3, and Rate 6 of
Table 4). These columns permit the analysis of the anchor and the change
in the behavior of the economic actors. The volatility is similar to
that observed in the column relative to the level of spread between
future interest rates. In periods when COPOM announces that it will
increase the SELIC until it achieves a level that will be maintained
"for a sufficiently long period," the volatility in the
minutes of December 23, 2004, and January 27, 2005, changes from 0 to +,
and in the minutes of February 24, 2005, the volatility remains
constant. (8) This observation strengthens the results found in the
analysis concerning the level of variables where the interest rates with
a higher maturity depart from those with a lower maturity. Due to the
indication by COPOM that the SELIC will be maintained for a sufficiently
long period, the public bets on lower differences among the future
interest rates. Another regularity, which is observed in Table 2, refers
to the fact that when the expression "for a sufficiently long
period" is published, the rate at which expectations readjust for
different interest rates is similar.

The information in Table 4 permits the observation of a sudden
movement in the volatility when the CBB adds some information to the
minutes (or when it explains the unanimous voting, or when it uses the
expression "wait for"). The minutes of February 25, 2004, May
27, 2004, September 23, 2004, and March 24, 2005, are those that cause
the higher change in the behavior of volatility. The minutes of June 23,
2005, and July 28, 2005, call our attention to the fact that COPOM
announced that it would maintain a stable SELIC "for a sufficiently
long period." In this case, the introduction of the expression
"for a sufficiently long period" implies a particular
movement--the first differences of all future interest rates follow the
same path. Following the minutes of September 22, 2005, these interest
rates converged to a first difference close to zero. Although the fact
that, in the minutes of June 23, 2005, the volatility did not change,
the interest rates in the minutes of July 28, 2005 have a different
readjustment rate and their volatilities tended to zero following COPOM
publication.

Another way to analyze the change in the behavior of economic
actors among different periods of opacity and transparency is through an
analysis of descriptive statistics. Table 5 shows the kurtosis relative
to the future interest rates for different maturities. The objective is
to analyze the impact of the words used by COPOM on market behavior. The
kurtosis for the period with high CBB transparency (July 27, 2004, to
December 2, 2005) is higher than the period between January 1, 2004, and
July 26, 2004. This observation is valid for all series except for the
future interest rate (1 month). If the asymmetry is compared the same
conclusion from the kurtosis analysis is reached. In other words, in the
periods of transparency, the relative prices took into consideration
more information on the economic future than in the periods that the CBB
only announces the SELIC target without the intensity of adjustment over
time.

Conclusion

The kurtosis analysis showed that the public's expectations
are anchored to the CBB's Inflation Report. Furthermore, the low
frequency of these publications together with the prospective analysis
concerning future inflation (and its risks) affect, with more intensity,
the variables related to inflation targeting. The uncertainty in
relation to the behavior of President Lula in the first mandate reduced
the capacity of the CBB to anchor long-run inflation expectations.
Therefore, the political opacity neutralized the advantages due to the
economic transparency, and the adoption of a forecast policy did not
have the desired effect. Bernanke (2004b) calls the forecast policies
"forecast rules," and he highlights the increase in the use of
this strategy compared with "feedback rules" (e.g., the Taylor
rule). In the period between the second half of 2002 and 2003, the
advantages of the forecast rules were neutralized by opacity, which
meant that the feedback rules became the instrument for guiding the
public's expectations.

The presence of an abnormal reaction of macroeconomic variables
denotes a lower capacity of economic actors to anticipate the CBB's
behavior at the moment of political crisis. In this sense, political
opacity negates the advantages of transparency in monetary policy
decisions. Hence, damage may be caused by the implementation of an
inefficient monetary policy. Our results for the Brazilian economy,
therefore, are similar to those found by Clare and Courtenay (2001).

In short, it is observed that an increase in the CBB'S
transparency, together with an increase in the quality of information,
implies a significant change in the rate of readjustment of market
expectations. This observation strengthens Winkler's (2000)
argument that central bank transparency is beneficial to the economy
when there is political stability. Furthermore, central bank
transparency helps anchor the public's inflation expectations and
long-run interest rates.

(1) An increase in kurtosis means an increase in the probability of
the occurrence of extreme events.

(2) All data series in this article use daily figures.

(3) Inflation is measured by National Consumer Price Index
(extended).

(4) The data are available from authors upon request.

(5) The period under analysis has been reduced with the intention
of capturing the effects of high political crisis.

(6) For an analysis concerning the CBB's credibility, see de
Mendonca (2007).

(7) It is important to note that although the COPOM emphasized the
necessity for maintaining the interest rate for an extended time, the
intention to increase the interest rate, when expected inflation is
above the inflation target, was revealed to the public. This
information, presented in COPOM minutes, was responsible for the
difference among interest rates of different maturities.

(8) In this case, "zero" means that the volatility goes
to zero (when zero is after the comma) or it starts from zero (when zero
is before the comma).

Helder Ferreira de Mendonca is Professor of Economics at Fluminense
Federal University and a researcher at the National Council for
Scientific and Technological Development. Jose Simao Filho is Visiting
Professor of Economics at Federal University of Juiz de Fora.